Non-Fungible Tokens, or NFTs as they’re more commonly known, have become hot property in the last few years, and this has led HMRC to clarify the tax position on these crypto assets.
If, like many people, you find yourself on the cryptic side of ‘cryptocurrency’, you’ll likely have a lot of questions – what are they, how do they work, and are they worth it? We’re looking at the emergence of these tokens, what they mean for business, and what your tax position could be if you own, make, or profit from NFTs.
In simple terms an NFT, or ‘non-fungible token’, is a unique digital token which represents the ownership of an asset. It’s essentially a digital certificate of ownership rights.
This is recorded on a blockchain, a type of digital ledger shared across a network which stores data as a series (or chain) of blocks. Each block in the chain contains a map of the previous one, linked together using cryptography.
It makes the ability to make changes difficult to the point of improbability, so NFTs and blockchains are considered highly secure.
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What is the difference between fungible and non-fungible assets?
The term ‘non-fungible’ refers to an asset which is unique, and can’t be swapped like-for-like, replaced, or duplicated.
Fungible assets cannot be distinguished from one another, and they are easily interchangeable
A tangible, real-world example of a non-fungible asset might be land, diamonds, or paintings. Their uniqueness means that assessing the value of a non-fungible asset needs a bit more consideration. For example, the sale price of a painting might depend on the artist’s popularity, the rarity of their work, and current trends in the art market. It can even vary depending on the seller, and what they think their customers are willing to pay for it!
In comparison, fungible assets are mostly indistinguishable from each other, so currency is an excellent example. If you were to exchange a £10 note for two £5 notes, the value is the same.
What can NFTs be used for?
NFTs have become a serious business with a wide variety of different uses, such as:
Proof of ownership
Ticketing or access control
As something of value in their own right
For instance, in March 2021 art auction house Christies became the first major auction house to offer a purely digital work with a unique NFT. Everydays: The First 5000 Days by artist Beeple is a huge collage of his Everydays project and sold for a mind-blowing $69.3 million. Christie’s was even prepared to accept cryptocurrency as payment for the artwork.
In 2021, the creator of Twitter, Jack Dorsey sold an NFT of the first-ever tweet for a remarkable $2.9m. A year later the NFT had lost 99% of its value, so it’s fair to say that the market for NFTs is variable – much like any asset that you might invest in.
NFTs can also be used for digital items, and any digital asset can be represented, from digital artwork to avatars within a game, collectables, or even the ownership of Tweets. The extent of the marketplace is endless.
A creator or artist will create a smart contract which contains important information relating to the digital works, and in turn, creates an NFT. From that point onwards, purchasers, or ‘collectors’, are then able to purchase exclusive ownership rights of the digital assets listed on the blockchain.
Ticketing using NFTs
Because NFTs are unique they can be used as an access control device. Discord communities are forming that only allow entry if you hold a specific type of NFT. No NFT, and you’re not coming in!
By the same token (pun intended) NFTs are being used as a way to control access to physical events such as concerts or sporting matches. Mariah Carey recently launched her own NFT, with the winner and a guest being entitled to fly on the star’s private jet and dine with their idol.
Can NFTs have a value in their own right?
Their very unique nature can mean that owning an NFT is, in its own right, also valuable. NBA TopShot is a good example of where a market has developed purely on the basis of NFT minting and distribution. The owners can regulate the value of types of NFT by only minting certain amounts of each, and thus making the chance of owning one more or less likely.
Gaming is an area where NFTs have also achieved a great deal of traction as a method of distributing value through online gaming platforms in a secure manner.
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Buying and selling NFTs
NFTs can be created, bought, and sold just like any goods and services and this perhaps is a clue to the tax position on these. For instance, if you run a business with a valuable brand and create NFTs that have value for your customers, then it’s much like creating and selling an exclusive line of t-shirts or a music file.
At the same time, you can buy these products for use in your business. You might use them as an investment, or a promotional tool, or to give away to customers and staff.
Just like your exclusive line of t-shirts, you need to have a route to market, and like NBA TopShots, you can develop and run your own crypto platform. Admittedly for many companies, the technical expertise and cost will be out of reach, but you could do it. Alternatively, you can use NFT trading platforms or marketplaces.
OpenSea, the largest NFT trading platform, is a good example of these but to a very large extent, what you are buying and what you are buying it for will often dictate the marketplace you choose.
How do I pay tax on NFTs?
When it comes to tax on NFTs, the easiest thing to do is forget they’re crypto assets and think of them as something more conventional, such as a car or house. At this point though, it’s crucial to understand that NFTs aren’t protected by the Financial Services Compensation Scheme, so anything you invest could all be lost.
The way you pay tax on NFTs is pretty much the same as any other asset or income
For example, if you’re an artist and sell your work through your own limited company, you could decide to produce NFTs and sell these through your company. Any business profits will be subject to Corporation Tax in the same way they normally would, and in turn anything you decide to pay yourself from the business will also be taxed in the usual way.
Another example could be if you ‘dispose’ of an NFT – such as by selling it, gifting it to someone else or swapping it, or using the NFT to pay for goods or services. Just like any other asset, this might mean that you’re liable to pay Capital Gains Tax.
If you buy and sell them, or use them in your business, then there may be a tax charge. HMRC list more details about tax of crypto assets for business in their manual.